Federal Reserve Bank of Richmond President Jeffrey Lacker has sometimes been called “the great dissenter” when it comes to the U.S. central bank’s biggest influence on the economy: setting interest rates.
Since the Fed cut rates to an unprecedented low during the economic recession in 2008, Lacker has often been a dissenting voice warning of the risks of keeping rates too low for too long.
A voting member this year of the Fed’s policymaking Federal Open Market Committee, Lacker dissented in September and October when all the other members voted to keep interest rates near zero as an ongoing stimulus to the economy. The last time he was a voting member was 2012, as a part of the rotation among Fed regional bank presidents.
Now, with signs that the economy is gaining traction, Fed watchers are predicting that the other members of the FOMC will finally agree with Lacker and bump up rates by a quarter-point at its meeting this Tuesday and Wednesday.
Though he is known for his sometimes contrarian stance on interest rate policy, Lacker has devoted many of his public speeches to issues that he sees as having a more significant, long-term impact on the economy than short-term interest rates.
Those include workforce training and early childhood education. He has advocated stronger early childhood education programs as an investment in economic growth.
Lacker, 60, recently sat down in his office at the Federal Reserve Bank in downtown Richmond to answer a wide range of questions. He was joined by John Weinberg, a staff economist at the Federal Reserve Bank of Richmond.
What follows is a transcript of the conversation, edited for length and clarity.
Q: It sounds like your colleagues on the FOMC are coming around to the idea that a rate increase is needed. Is there anything you can say or predict about the upcoming FOMC meeting?
A: The economic news going into the September meeting looked very favorable to the prospects for raising rates, with the exception of developments in global markets.
I think that made it a very close call for some of my colleagues, and out of an abundance of caution they wanted to pause and see how those global developments played out. I think what has happened since September has made it clear that the downside risks that seemed possible in August have diminished substantially.
It does seem now that job market conditions continue to improve at a very healthy clip. I think the employment report for October is what, in the minds of many observers, has sealed the case for a rate increase.
Of course, a lot can happen between now and then, and there is some more data to come in, but I think the case has been strengthened since September.
Q: Statistics indicate that the economy is getting better. But many people still say that the job market is weak. Why do you think we have this ongoing perception that the economy is not going in the right direction?
A: It’s a diverse economy with a lot of different businesses, different markets and different people in different circumstances.
When you conduct monetary policy for the country as a whole, you have to look at the broad aggregation of what’s going on and balance the areas that are doing well versus the areas that are lagging.
There are always going to be some markets, some industries where fortunes are turning, and markets are moving away from them. We recognize that is an important, and to some degree healthy, part of an economy, where new things come along and supplant the old.
That imposes some costs on people to kind of uproot occupationally and move to some line of work that the markets are now favoring.
The unemployment that goes along with that is something economists call frictional unemployment. In a well-functioning economy, there is going to be some slippage as people and capital move from one industry to another industry.
Q: You have spoken about structural issues affecting the economy beyond monetary policy. What are they?
A: The nature of the skills that firms need has been shifting.
We had a lot of people employed in residential construction before the crisis. We built a lot of housing, but housing activity is down now. There are fewer people devoted to housing and housing construction than there were.
Another big shift is going on in retail versus online sales. That is leading to some weakness in retail employment, but in the longer run you get increases in employment at places like Amazon.
It used to be there was a heavy demand for clerical work, and now a lot of clerical work has been automated.
The demand is for people who can do higher-order analytical work, and work with technology and applications that store, retrieve and manipulate information digitally.
The nature of the skills that our economy needs has been changing over time, and if you look at broad sweeps of time it has been pretty dramatic.
Q: Is the change what you have spoken of as skills-biased technical change?
A: This is something that economists have identified as a feature of growth over the last couple of decades — that the nature of technological innovation has favored workers with skills.
It has made them more productive and move valuable over time.
That is what most economists attribute the widening of the income distribution to. The way technology has evolved has put a premium on those with the skills to use modern technology, and that has widened the income distribution.
Q: Has that become more pronounced recently? You have talked about a skills mismatch in the labor market.
A: I’m not sure it is more pronounced, but that trend has continued. We hear, around our district, abundant reports of companies that are having trouble finding workers with the skills they need.
That difficulty isn’t limited to very highly skilled professions like information technology. We are hearing it in a range of areas, like building trades, for example.
Q: You have mentioned in some of your speeches that the results of workforce training programs are sometimes not effective. What does that indicate about the way we approach our workforce training?
A: We have a history going back several decades of government-funded workforce training programs — some of them aimed at workers dislocated due to imports, for example — and these have a very mixed record.
It seems as if the most successful programs are ones where the training is tied to an identifiable demand.
You have a firm or a set of firms that have a need for a particular type of skilled worker, and the firms themselves work with the training providers, like community colleges or technical institutes, to design the curriculum.
Those programs seem more successful than programs that are aimed at just training workers, where there isn’t a close tie to what skills are in demand.
Q: You have said a few times that these programs may be getting to people too late. What do mean by that?
A: The general point is the earlier in someone’s life you can give them skills, the bigger the payoff, because you have a longer time period to reap a return from that investment
Q: Is that why you have been speaking in favor of early childhood education?
A: Yes, it is. In addition, investing in early childhood education seems to make investments in education later in that person’s life more productive.
It makes it easier for them to learn skills later. It makes investments in K-12 education, career and technical training, and college education more valuable and more rewarding.
Q: How early in life should we be doing this for children?
A: There has been some controversy, and some studies that have turned up limited or minimal results from some early childhood programs, or results that show the effects aren’t persistent.
There are other studies that have shown very strong, persistent effects. It looks as if the important telling factor is the quality of the program.
Q: Do you think there are misconceptions about what monetary policy can accomplish?
A: In the popular accounts of monetary policy, I find it a little frustrating that people ascribe too much power to central banks, for good and for ill, in terms of our effect on real economic activity.
I thought we got too much credit in the early ’90s. People thought the tech boom was something we contributed to strongly, and I don’t think so. We provided a background of monetary stability, but it was up to entrepreneurs and innovators to really create the ingredients for economic growth.
Similarly, over the last decade or so, economic growth has disappointed. There are couple of reasons for that.
I don’t think monetary policy could have done much to increase growth beyond what we saw. I think the recession we went through was largely independent of monetary policy.
The growth experienced since then has been disappointing largely because productivity growth has been slow and population growth is lower than it was a couple of decades ago.
Understanding those is difficult, but it is fairly clear that the contribution of monetary policy to the process of innovating and implementing innovations is indirect at best.
Q: In your travels around the Fifth District, what have you heard from the people you meet about your dissenting views on the FOMC on interest rates? (The Fed’s Fifth District includes Virginia, the Carolinas, Maryland, the District of Columbia and most of West Virginia.)
A: It was interesting. In September after the committee’s decision not to raise rates and my dissent, I heard a lot of people say, “We thought you were going to raise rates. What happened?”
There was a widespread expectation that we would raise rates. I think a lot of people understand why we need to raise rates and the case for that.
I have heard from a lot of people that agree with my vote. I have my supporters and detractors, all the time.
Q: A quote has been circulating in the media lately — “a mechanism for high frequency harassment” — which was a comment you made about legislation now being considered in Congress to audit the Fed.
A: I completely understand the concern about the Fed’s expansive powers, and the desire to improve transparency. This provision of the bill that has to do with auditing the Fed is poorly conceived, and I think it is based on a mistaken premise.
We are heavily audited. The General Accounting Office can audit virtually everything we do.
The one thing they can’t do are these snap audits of our FOMC decisions right after a meeting, which this bill would allow. We have an external auditor that audits our financial statements the way any public company would be audited by a third party.
We publish our balance sheet every week. There aren’t many companies that do that.
We publish the transcripts of our policy meetings with a five-year lag. I would not be against making that a three-year lag.
Madame Chair [Federal Reserve Chairwoman Janet Yellen] testifies before Congress. We strive to be transparent and we have tried to increase that transparency since the crisis.
I don’t think this [legislation] is designed to increase transparency. I think it is designed to give members of Congress a means to order a GAO audit in order to make some political statement about our meeting-to-meeting decisions.
What that compromises is the measure of insulation from electoral politics that we have as an independent institution.
Historically there have been numerous instances of [presidential] administrations and Congress pressuring the Federal Reserve to make policy in a very short-sighted way. There are instances in which that had long-run effects that were deleterious.
That was the source of that phrase.
Q: What worries you? What keeps you up at night?
A: Conditions can change, and rapidly.
I think back to the period from 2003 and 2004. In the middle of 2003 we were worried about inflation being too low, and a lot of people now are worried about inflation being too low.
But by early 2004 inflation pressures had emerged, and we had the opposite concern.
I think, in hindsight, we moved too late and too slow. So I worry about us slipping behind the curve.